Practice Management Small Business

Should You Take Out a Second Business Loan?

Written by Jared Hecht

It’s a good time to be the owner of a small accounting firm. Despite the many large corporations that seem to dominate the marketplace, small firms are still the backbone of the American economy. And, according to the U.S. Treasury, since the Great Recession, banks participating in government-funded programs to back small businesses have boosted their lending to such firms by $3.5 billion.

If you’re the owner of a small accounting firm, you may already recognize the value of applying for a small business loan. Perhaps in the past applying for one meant the difference between being able to expand your operation and not being able to. Maybe you’ve applied for invoice financing during a rough patch with a client, which made it possible for you to still make payroll.

But if you’ve recently been approved for your first small firm loan, you may be hesitant to take out a second one. Am I moving too quickly? Do I really need a second loan?

Should — and Should not — Scenarios

Here are a several scenarios describing when you should—or should not—consider applying for a second loan for your small firm.

Should: Your firm is growing so rapidly that you can barely keep up.

This may sound counterintuitive, but bear with us: the healthier your firm currently is, the more it makes sense to take out a second loan. Business growth is a great thing, but if you don’t have enough funds to keep up with it, it can put you in a tricky situation—and you may miss out on major opportunities and short-term gains.

If you have potential customers wanting your business, but you simply don’t have enough working capital to fill their orders, taking out a second business loan makes sense. You may even be able to use the second loan to hire a few new employees, which could really help your firm to expand over the next few months.

Your second business loan should not be a buoy, not a life raft. Which brings us to a scenario in which you should not take out a second business loan:

Should not: You’re already so deep in debt that you can’t see the way out.

You may be thinking, But why would I take out a business loan if my business is doing well? Isn’t a loan supposed to help fill in financial gaps?

While it’s true that one of the purposes of a small business loan is to give you access to capital you wouldn’t otherwise have, you can’t depend on such a loan to solve all of your financial problems. If you’re trying to solve an operational loss, or owe a severe amount to creditors, a second loan is going to hurt your accounting firm more than it helps—you’re going to be just as deep in debt as you already are, if not deeper.

That said, there are alternative lending options beyond small business loans that might work in your favor. Accounts receivable factoring may be a worthwhile option, and if your current loan situation is less than desirable, you may want to consider applying for business debt refinancing.

If business debt is your biggest issue right now, think of ways you can give yourself a leg up in getting out of the hole without applying for more financing. That means cutting costs wherever you can, perhaps by ditching the office space and working from your basement for a while until things are once again smooth sailing. Do what you have to do!

Should: Your current loan has favorable terms.

Beyond whether or not you actually need a second loan, you also have to consider whether paying if off will fit into the current financial situation of your accounting firm.

Take a look at your current loan situation. Are you having any issues making your payments? Have all your assets been tied up as collateral? Is your interest rate high and nearing an unmanageable level?

If you answered “yes” to each of these questions, taking out a second loan is probably not the right option for you at this time. But if you answered “no,” good news—it’s highly possible that a second loan will work well alongside your current situation.

Should not: You have no idea what you’ll use the money for.

This may sound obvious, but you shouldn’t apply for a loan for your accounting firm—let alone a second one—if you don’t know what you want to use the extra capital for.

In fact, when applying for a traditional term loan, banks will want to see a clear and concrete business plan. For their own security they will want to know exactly what you’re going to do with the funds. Not knowing what you plan to do with the funds is a surefire way to get your application rejected.

Maybe you’re considering applying for a second small business loan because you simply need increased cash flow. If that’s the case, and your business is doing okay otherwise, you may want to instead consider opening a business line of credit.

What Small Business Lenders Look for in Approving a Second Loan

If you’ve decided that, yes, now is the right time to apply for a second small business loan, take some time to revisit what it is that small business loan providers look for. It may have been a while since you last applied for a loan, so give yourself a refresher.

One thing to consider this time around is your Debt-Service Coverage Ratio (DSCR). Banks and other lenders use this to make sure that you have enough cash flow to pay off your debts. As long as you have paid down most of your debts, or have a solid plan for the debt you’re still paying down, and you have steady income and incoming receivables, you should be good to go.

Additionally, if you have a good relationship with your previous lender—meaning you’ve made your payments in full and on time—they should be able to recommend you as a desirable borrower—or want to offer you a second loan, or refinance your existing loan.

The catch-22 of borrowing money is that it’s much easier to be approved when you’ve already borrowed in the past, because lenders can see that you have been responsible in paying your loans back.

Bottom Line

No matter your reason for applying for a second loan for your small accounting firm, be sure to have a plan in place. As long as you can show that your firm is healthy, and how you’ll use the newly introduced capital to continue on your path of growth, a second small business loan could be the boost you need.

About the author

Jared Hecht

Jared Hecht is the CEO of Fundera, an online marketplace for small business loans. Prior to Fundera, Jared co-founded GroupMe, a group messaging service that was acquired by Skype in August 2011, and subsequently acquired by Microsoft in October 2011. Jared currently serves on the Advisory Board of the Columbia University Entrepreneurship Organization and is an investor and advisor to startups such as Codecademy, SmartThings, and TransferWise.

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